22. Pricing Biases

 

Wireless Philosophy, Cognitive Biases, 3:41. Original title: CRITICAL THINKING - Cognitive Biases: Pricing Biases [HD]

Summary

Laurie Santos (Yale University) continues her series on cognitive biases with pricing biases: the tendency to judge quality by price alone.

A raffle prize

Imagine winning a bottle of wine in a raffle, and having to choose between a twenty-dollar Californian Pinot Noir and a fifty-dollar Pinot Noir from the same region. Most people, Santos says, pick the pricier bottle, whether the choice is between wines, meats or even cassette players. What is stranger is that we still prefer the higher-priced good even once we know the price is arbitrary.

The price effect

Simply telling someone something costs more makes them like it more.

The neuroscientist Hilke Plassman and colleagues had participants taste wine poured from bottles labelled ten dollars or ninety dollars, without telling them that both bottles actually contained the identical wine. Participants reported liking the "ninety-dollar" wine better, even though there was no difference to taste. Santos calls this confusion of price with value the price effect, and notes that it holds for many different kinds of goods.

Confirmed in the brain, not just on paper

Plassman's team suspected that participants might simply be saying the pricier wine was better without actually experiencing it that way, so they also used brain imaging to compare how the identical wine was processed at different price tags. The reward-processing regions of the brain, the same ones that fire when someone wins money, sees an attractive person or tastes an amazing dessert, fired more strongly for the very same wine when it carried the higher price. The bias, in other words, is not just something people report; it shows up in the brain's own reward response.

Price changes performance, not only perception

The behavioural economist Baba Shiv and colleagues let people pay different amounts for the same energy drink and then tested its effects. People who paid more reported feeling more energised after drinking it, and also did better on a set of mental acuity puzzles, from the identical drink that others paid less for.

Key takeaway

Because our minds assume that a higher price means better quality, even when the price is entirely arbitrary, pricing biases affect not just what we are willing to pay, but how good something actually seems, and even performs, to us.